Is a Solar Energy System Right for Your Organization?

Swift, Kenton D., Management Accounting Quarterly

INCREASED INCENTIVES-ESPECIALLY FEDERAL INCOME TAX INCENTIVES-AND THE FALLING COST OF EQUIPMENT HAVE CONTRIBUTED TO A GROWING INTEREST IN THE POTENTIAL OF PHOTOVOLTAIC SOLAR ENERGY SYSTEMS TO PROVIDE ELECTRICITY AT A COST THAT COMPETES WITH CONVENTIONAL ENERGY SOURCES. THIS ARTICLE DESCRIBES WHAT ACCOUNTANTS AND FINANCIAL PROFESSIONALS NEED TO KNOW IN ORDER TO DECIDE WHETHER OR NOT TO PURCHASE A SYSTEM. THREE REALWORLD EXAMPLES ARE PRESENTED TO ILLUSTRATE HOW THE INPUTS TO SUCH A DECISION SHOULD BE SCRUTINIZED USING A CAPITAL BUDGETING ANALYSIS.

With all forms of energy consuming greater and greater proportions of capital budgets, there is a growing interest in alternative sources of energy. On the short list of these sources are photovoltaic solar energy systems (PV systems), which are increasingly popular because of the available incentives for purchasing and installing them and because of their ability to generate power at competitive rates. Unfortunately, there is also a lot of hype, rather than careful analysis, related to the benefits of installing solar energy systems. Deciding whether to purchase a solar energy system requires understanding and evaluating a number of technical variables. This can be a daunting task.

The purpose of this article is to describe the set of information needed as inputs in making the decision to purchase and install a PV system. This article will also discuss resources for finding the data needed to help accounting and financial management professionals make the right decision and will present three realworld examples of how the inputs should be examined using a capital budgeting analysis.

SCRUTINIZING FOUR KEY ELEMENTS

The information needed to decide whether to purchase a PV system can be divided into four general categories:

* Cost of electricity: The present and future electricity costs that will be saved by installing a PV system.

* Sunlight: The amount of sunlight, or solar radiation, available to provide power for the PV system.

* PV system costs: The cost and performance of photovoltaic panels and related components of the solar energy system.

* Financial incentives: The tax and other incentives provided by federal, state, and local governments and by utility companies.

Factor 1: Cost of Electricity

PV systems provide electricity, offsetting the amounts that would otherwise be paid to a utility company. A basic input to the decision to purchase such a system, therefore, is the cost of electricity that will be saved.

Electrical power is measured in watts, and electricity is priced in thousands of watts used per hour, or kilowatt-hours. Most companies keep a record of the kilowatt-hours used in recent years and the amounts paid for those kilowatt-hours. Where historical records do not exist, the Energy Information Administration (EIA) provides statistics on the average retail price of electricity in different regions of the United States. For instance, the average price in the United States for 2010 was about $0.10 per kilowatt-hour, with Hawaii having the highest rate at $0.25 and Wyoming having the lowest rate at $0.06.1

Although the EIA's website is a good place to begin looking into electricity rates, it is important to note that actual rates can vary based on the time of day (called time-of-use (TOU) rate scheduling), the month of the year, and/or the total volume of electricity used during the month. In addition, some states require utilities to enter into contracts with solar energy companies under which the rate paid for electricity produced by such systems is fixed for a number of years and is above current electricity rates. These contracts are referred to as "feed-in tariffs." Thus, in considering the installation of a PV system, some thought needs to be given to exactly which electrical rate the energy produced by the solar electric system is actually replacing and/or how much will be received for the solar electricity produced. …

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